Why oil marketing companies are the most unloved and hated

Oil marketing companies (OMCs) remain in focus even as space has been the most unloved and hated recently with the sector hugely underperforming while other public sector undertakings (PSU) and parts of the market have done well. The reason being, oil is down very sharply. It fell $20 per barrel in the last month.

While this is a straightforward positive for oil refiners, it is also significant for the marketing side of the business.

OMCs were hammered over the last two quarters with cumulative losses running into thousands of crore. The previous two quarters saw higher crude prices. However, prices on retail pumps remained unchanged due to various factors. With prices now on a downward slope, shares are attempting a rebound from the lows.

However, there has been slight correction and after two-quarters of very bad news, it is possible that in terms of margins, things may be turning around for oil marketing firms.

Oil needs to stay lower and maybe go even lower and not see a big rebound because if it starts to move higher once again, the thesis goes out of the window.

While this is not a recommendation, it seems at least both on charts as well as in terms of fundamental news flow that margin may start to turn a little bit.

Out of the three public sector OMCs — Indian Oil Corporation, Hindustan Petroleum Corporation Limited (HPCL), and Bharat Petroleum Corporation Limited (BPCL) — in terms of setups, HPCL looks the best.

Though the overall market overlay is negative, the OMCs are something to watch out for and keep on the radar.

Brokerage firm Citi believes that diesel is close to breakeven levels for OMCs from a retail marketing perspective and could even quicken the pace of earnings normalisation for the oil refiners.

Prabhudas Lilladher has also upgraded all three oil refiners to buy citing the sharp correction in crude oil prices. Softening crude prices augur well for OMCs as at current prices, diesel marketing losses turn around to a profit of Rs 3.5 per litre from a loss of Rs 13 per litre in the first half of the current financial year.

HPCL is the brokerage's preferred pick as its marketing share is double of refining.

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